As many of you know, I’ve spent the last 6 years of my life representing homeowners in state court as they defended foreclosure actions against their homes. While we have been successful in many cases in identifying technical legal issues that have delayed or often even stopped foreclosures, the primary goal of most of our firm’s clients has been to find a way to renegotiate the terms of their loan to return to becoming as one client put it to me yesterday, “ a regular boring mortgage paying homeowner”.
If you believe the national financial press, the lawyers who represent the bondholders who purchased the bonds backed by the loans owed by my clients and the economists who study the housing market of all ideological stripes agree that the net present value of mortgages “marked to market”, meaning with the principal reduced to something near the value of the collateral real estate are more valuable to those who invested in them than homes that are liquidated by foreclosure and sold below market value.
At the end of the day, in most cases the economic interests of homeowners who are in default but are currently employed are aligned with the ultimate beneficiaries of their payments (or those who ultimately suffer if they fail to pay or are foreclosed on). Often the end investor is the United States Taxpayer who still holds the vast majority of stock in Fannie Mae and Freddie Mac by far the largest investors in American mortgage notes.
Today New York Times columnist Joe Nocera reminds us that in 2009 U.S. Senator Richard Durbin, D-Illinois introduced legislation that would have changed the Federal Bankruptcy code to allow homeowners the right to modify their mortgage in Bankruptcy. The only type of secured loan that cannot be rationalized to value in Bankruptcy court right now is a person’s home loan. Senator Durbin understood then, and it is just as true now, that this make no sense.
President Obama both as candidate and as President and his lap dog for banks Secretary of Treasury Tim Geitner failed to support Senator Durbin’s efforts to amend this change in the Bankruptcy Code into several of the economic recovery and bank bailout bills which ultimately passed.
Standing in the way of protecting homeowners and investors were and remain the nation’s large banks and loan servicers who have benefitted from billions of dollars in default servicing fees and ancillary charges such as commissions on forced-place insurance and mark ups on foreclosure related costs.
Unfortunately, the remedies available to lawyers and judges in state court, even those who have a passion to help homeowners, do not always match the needs and desires of the homeowners, or ironically the investors who the loan servicers and their foreclosure mill lawyers are supposed to be protecting.
The Bankruptcy court provides a perfect forum for negotiation and or imposition of principal reduction modifications that are fair to both lender and homeowner and designed to succeed based on a careful review and understanding of the homeowner’s finances and the economics of the local housing market. Bankruptcy judges in each Federal Judicial District are very local and the Judges and Chapter 13 trustees will have a firm understanding of local housing values aiding in the fair resolution of these. Bankruptcy judges and lawyers place a premium on resolution of conflict often providing swift resolution of complicated issues.
Bankruptcy filings are currently down across the country but, Bankruptcy judgeships and courts are fixed by statute leaving capacity to handle an increased caseload that a change in federal law might generate.
New Consumer Finance Protection Bureau Regulations streamline loan modification processes and create legal liability for loan servicers who fail to promptly and honestly review homeowners for available loan modification options. Pairing the newer, legally enforceable honest loan modification processes with a legally enforceable right to a fair principal reduction modification of one’s loan could actually allow most of these modifications to be accomplished outside of either bankruptcy court or the foreclosure process.
Our economy will not recover until the tens of millions of homeowners in this country who are underwater or in default can see a path to resume participating in the broader economy. Reforming the bankruptcy code to create legally enforceable remedies for homeowner loan modification could be a huge step forward to bolster the economy, while at the same time providing a benefit to investors in mortgage backed securities.